Ameriscam, Inc. is considering the issuance of some perpetual preferred stock. The Company's corporate tax rate is 30%, and the yield on its outstanding senior debt is 7.55%. Additionally, Ameriscam has been told by a leading investment bank that if issued, its preferred stock would merit a price of $40 net of flotation costs and other charges. If issued, the firm plans to dedicate preferred annual dividends of $2.35 per share. What is the cost of the proposed preferred stock for this firm?
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The cost of preferred stock can be found by dividing the annual dividend by the issuing price, which is net of any underwriting, or "flotation," charges. The cost of preferred stock in this example is very low. Typically, the cost of preferred stock is greater than the cost of debt but less than the cost of common equity.